Will Drought, Failure of Corn Crops Lead to Higher Gas Prices?

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Drought is causing failure of many corn crops. Will it increase the price of gas? (desmoinesregister.com)

Did you know that the United States is the largest grower of corn in the world and that it’s our country’s number one (legal) cash crop? Corn makes up a little over 15 percent of the total crop market, one that’s valued at over $100 billion, according to estimates from the U.S. Environmental Protection Agency (EPA).

All those millions of acres of harvested corn get utilized, too. According to the National Corn Growers Association, the vast majority of the corn crop goes to feed animals here and abroad, including livestock, poultry and even farmed fish. It also feeds us in a variety of ways, too.

Increasingly, use of corn as fuel has seen a dramatic rise. In 2011, 40 percent of the corn grown in the U.S. went to the production of ethanol. It gets blended into gasoline to act as a fuel system cleaner and in the case of E85, makes up the majority of the product. A small percentage of the corn crop also goes towards producing other alternatives, such as bio-diesel.

Since 60 percent of the land mass of the continental U.S. is now covered by drought conditions, many of the regions of the country where corn is a major crop – 78 percent of corn growing regions – have experienced drought conditions throughout the season. Thus far in 2012, the U.S. Department of Agriculture (USDA) has declared, 1,369 counties in 31 states as disaster areas – 1,234 due directly to drought – and USDA continues to lower projections on harvests.

The drought is certainly affecting farmers who grow corn. 45 percent of the U.S. corn crop is now rated in very poor to poor condition, according to USDA’s National Agricultural Statistics Service.. That number represents the worst conditions for any time of year since 1988, says the USDA.

E85 Seems Cheaper than Gas – Is It?

There are a number of flex fuel vehicles (FFVs) on the market that can burn normal gasoline – which often contains 10 percent ethanol, and some have called for the federal government to mandate increasing to 15 percent – or E85, which is a blend of just 15 percent gasoline to 85 percent ethanol. There are over 8 million FFVs in operation in the U.S.

E85 is often the cheapest option by the gallon when a filling station offers it, and it’s often given government pricing subsidies. At the start of the year, an oversupply of ethanol saw low prices, but as traditional gasoline prices have fallen, most drivers with flex-fuel vehicles have opted to fill up with gasoline. And pressures on the corn supply have led to increases in the price of ethanol.

According to 85prices.com, the nationwide average cost of a gallon of gas sits at $3.42. E85, on the other hand, has an average U.S. price of $3.09 a gallon. Using basic math, it’s apparent that E85 is $0.33 cheaper per gallon than gasoline on average, a pricing spread of 9.1 percent.

However, there’s a dirty secret at play that requires more than simple subtraction to gauge. E85 simply don’t achieve the same fuel economy with gasoline and ethanol. E85 vehicles often lose 25 to 30 percent of the MPG delivered when using the ethanol-heavy E85 instead of gasoline. That effect is due to E85 having less energy content than gasoline.

While some pundits maintain a $0.40 spread is sufficient, consumers only need give a quick glance to the official numbers provided by the EPA to see that using E85 costs more than burning gasoline, even if a gallon of E85 is priced lower.

If Gas Prices Rise, the Amount Should Be Slight

Because ethanol does contribute to the makeup of most gasoline sold in the United States, price increases due to drought will be felt in the cost of gasoline, but only moderately.

Dave Sykuta, Executive Director of the Illinois Petroleum Council told CBS television station KMOX there’s probably no danger in the drought posing “a big immediate jump in gasoline prices because of an ethanol shortage.”

Skyuta additionally advises that there’s plenty of corn in storage, and federal regulations govern fuel production. However, he’s quick to caution that “it remains to be seen whether the corn supply will effect future gasoline prices.”

However, Shyuta only takes cost of ethanol and potential crop projections into consideration. The price of crude oil has the biggest percentage of the cost of gasoline, estimated to be 62 percent during June 2012 according to the U.S. Energy Information Administration (US EIA). Even though ethanol makes up 10 percent of most fuel blends, it’s a lower fraction of the overall cost.

About Cecil Helton

Cecil Helton is a U.S.-based writer and editor with passions for cars, motorcycles, boats, technology and social media. Much of his professional life since 1996 has been web-centric, and he’s written and developed content on a variety of subjects. His work in the houseboat industry received wide acclaim, such as winning the 1999 Cisco Systems Growing with Technology award and being named one of five finalists in the manufacturing sector of the 2000 Computerworld-Smithsonian Awards. As an Air Force brat, he spent much of his childhood in a two-year cycle of moving to a new place, making new friends, establishing a life, and then moving again. Destinations included: Kentucky, Illinois, Texas, the Greek isle of Crete, California and Ohio. Today you’ll find Cecil coping with his 15 year old son’s decision to pursue a motorcycle license at the same time he gets his driver’s license, being active across the web on multiple social media sites, and of course, writing articles and creating content on automotive and car insurance related topics right here at CarInsurance.org.